High Interest in Low Interest

Student borrowers scramble to beat a deadline for cheap rates

If you have federal student loans, the date July 1 should be in flashing red lights. That's the deadline to consolidate loans at the lowest interest rate ever. Instead of making multiple payments to different lenders at variable interest rates, you'd have one monthly payment at a rate that, crucially, will stick in the same low place throughout the life of the loan. Recent grads, still in their six-month grace period, can lock in a rate as low as 2.77 percent, and borrowers already paying can go as low as 3.375 percent.

"My dad's applying for consolidation now," says Ryman Sneed, 22, a North Carolina native who graduated from Marymount Manhattan College with a BFA in drama last month and is auditioning while waitressing full-time at Bowlmor Lanes. "I'll start making payments in August. To be honest, I don't really know what all goes into that. I just know I have to pay off the loans and factor it into my expenses."

Going through consolidation may seem like a bit of extra red tape in an already complicated process, but in this case it's worth it. According to lending company Nelnet, a grad like Sneed, who owes $20,000, could save about $4,300 over a 20-year repayment period by locking in the current rate. On July 1, the rates, set annually by the results of a 91-day Treasury bill auction, will be hopping to 4.7 percent for new grads and 5.3 percent for others. That's the biggest single rate hike in the 40-year history of student loans.

Consolidation only becomes a bad value, says Kate Rube of the State PIRGs' Higher Education Project, when borrowers take advantage of the opportunity to procrastinate. "You don't need to stretch out your payments just because you're consolidating, and students shouldn't let lenders tell them differently. You should pay on a monthly basis as much as you can manage." In other words, don't forego 10 high-payment years for three decades of obligation and compounding interest.

There's evidence that grads like Sneed are rushing through the consolidation window. Local-news outlets from St. Louis to Syracuse have run stories on the change. Alumni e-mail lists are abuzz. Consolidation lenders are bombarding students with solicitations. College financial aid offices are doing their part too, sending out e-mails and hosting information sessions.

Still, as Sneed suggests, it's not always easy to get overwhelmed grads to pay attentions. "A month ago, we physically mailed out 800 invitations to students who had loans to let them know it's in your best interest to consolidate now," says Chloe Haygood, a cheerful financial-aid representative at Tulane University in New Orleans. "All of our preferred lenders came out. We had a turnout of 50 or 60 people. It was finals week, so we'll attribute it to that!"

For those a few years out of school, consolidation can be even more daunting. Tamala Dunn earned her B.A. from Rutgers in 1998. Over the years, she received a series of deferments and forbearances because of low income. By the time she finally started making payments this January, the initial $16,000 had ballooned, with interest and fees, to around $27,000. "I came across an article that indicated this was the final month to get low interest rates," said Dunn, now a mother of four. "I'm still trying to figure out the consolidation process and who I should choose for my lender."

Haygood reminds anyone considering consolidation to start by going to http://nslds.ed.gov, a government database where you can check the current status and originators of all your student loans. If you hold loans from more than one lender, you have the right to shop around, and it's worth it: Some plans come with a .25 percentage point reduction on the existing interest rates, others allow consolidators to keep their six-month grace periodwhich is ordinarily waived upon consolidationand some will discount the interest or the principal after a certain number of on-time payments.

Borrowers should also consider getting a consolidation loan directly from the federal government by going to loanconsolidation.ed.gov. The feds offer a variety of repayment plans, including an income-contingent plan. The State PIRGs offer their own website, pirg.org/consolidation.

The Department of Education has announced that current students, for the first time, will be allowed to consolidate, if they're willing to start paying back their loans as soon as they graduate. The only catch is that if you've already consolidated once, you won't be able to do it again unless you go back to school and get another loan.

Consolidation is such a great deal for students, in fact, that the big lenders would like to make it go away. "They don't like it because it encourages so much competition," says Rube of the State PIRGs. She cites lender-backed bills now in Congress to eliminate fixed-rate consolidation, which the Higher Education Project is opposing.

For now, though, the lenders still have to beg for your business. "I've never seen it this competitive," says Haygood, a 2002 graduate of the University of New Orleans, who has her own student loans from her first year of graduate school and is herself planning to consolidate. "I've received e-mails from two different lenders, saying 'We have your application all ready to go, just sign here!' 